UPDATE 2-Fed nominee says data will dictate time to tighten

Reuters Staff

4 Min Read

* Faster growth could pull rate hike forward -Stein

* Powell: Fed must time exit carefully

* Panel may vote on nominees next week

By Mark Felsenthal

WASHINGTON, March 20 (Reuters) - One of President Barack Obama’s nominees to the Federal Reserve said on Tuesday that if the U.S. economic recovery accelerates, the central bank should abandon its pledge to hold interest rates near zero until late 2014.

At a hearing to consider his nomination for a spot on the central bank’s Washington board, Harvard economist Jeremy Stein said changing economic conditions could alter the currently expected policy course.

“If the economy were to strengthen faster than expected, it would be absolutely warranted to revisit, guided by the dual mandate, to revisit the path of the easing,” he told the Senate Banking Committee.

The Fed’s dual mandate is to promote maximum employment and fight inflation.

In January, the Fed said economic conditions would likely warrant keeping rates “exceptionally low” at least through late 2014, some 18 months later than its previous projection. It repeated that language after its last policy meeting a week ago.

Fed officials have said much the same thing recently, suggesting stronger-than-expected data on jobs and spending is making another round of central bank bond-buying less likely and moving the date of the first rate hike forward.

Another Fed nominee, investment banker and former Treasury Department official Jerome Powell, said the timing of the Fed’s departure from its ultra-loose policies is the most important challenge the central bank faces.

The U.S. central bank cut overnight rates to near zero in December 2008 and has bought $2.3 trillion in government and mortgage-related debt to push down other borrowing costs.

“In monetary policy, the task will be providing support for the still weak economy, but exiting the current highly accommodative policies in time to avoid higher inflation,” Powell said.

The nominees shed little light on how they would manage that task in their testimony before the committee, which needs to decide whether to forward the nominations to the full Senate for consideration. The Senate needs to back the nominees in order for them to take office.

GETTING BACK UP TO STRENGTH

Fed board terms run for 14 years, but both Powell and Stein have been nominated to finish out unexpired terms. Powell’s term would end Jan. 31, 2014; Stein’s would end Jan. 31, 2018.

If confirmed by the Senate, the nominees would bring the board to full seven-member strength for the first time since April 2006, although a fresh vacancy could arise soon.

The term of Elizabeth Duke, the last remaining George W. Bush appointee, expired at the end of January. While governors can stay in office until replaced, she has not committed to doing so.

Powell, a lawyer by training who worked at Bankers Trust, the Carlyle Group and Dillon, Read after leaving the administration of George H.W. Bush, would bring Wall Street experience to the central bank.

Stein, who worked for the Obama administration as an adviser to the Treasury secretary and as a National Economic Council staffer, has a doctorate in economics from the Massachusetts Institute of Technology and is an expert on financial market behavior.

Their views on monetary policy are not known. Generally, Fed governors are supportive of the chairman.

Having a full board presence would provide Chairman Ben Bernanke a stronger counterweight to the 12 regional Fed bank presidents, some of whom have dissented against recent policy decisions because they thought the Fed should back off its aggressive efforts to stimulate growth, or step up its stimulus.

The Senate committee is expected to hold a vote as early as next week on whether to recommend the full Senate approve the nominees.

Senator Richard Shelby, the top Republican on the banking panel, told reporters he would look at each nominee on his or her merits. Concerns of Shelby and other Republicans scuttled a previous Obama Fed nominee, economist Peter Diamond.